United States: FINRA Proposal On Predispute Agreements To Arbitrate Whistleblower Claims

Last Updated: December 19 2011
Article by Ken O'Brien and Philip M. Berkowitz

The Financial Industry Regulatory Authority (FINRA), the largest independent non-profit regulator for all securities firms engaged in business in the U.S., has proposed a long-awaited rule change intended to align its arbitration rules with the Dodd-Frank Consumer Reform and Wall Street Protection Act of 2010, Pub. L. No. 111-203, § 919 (2010) ("Dodd-Frank"), which invalidated predispute agreements to arbitrate certain whistleblower claims. The rule change would amend FINRA Rule 13200 of the Code of Arbitration Procedure for Industry Disputes, which presently mandates predispute arbitration of employment disputes (except statutory discrimination claims) between registered securities representatives and their employers.

FINRA's reach in America's financial life cannot be overstated. It oversees all securities, commodities and financial services firms doing business with the public, including more than 4400 securities firms, 160,000 branch offices and 635,000 registered securities representatives.1 Those in the financial services industry know that these hundreds of thousands of highly compensated individuals must complete Form U-4, pursuant to which they agree in advance to submit nearly all disputes with their employers, other persons, and related entities to final and binding arbitration under the provisions of FINRA's Arbitration Procedure.2 These predispute agreements to arbitrate typically preclude any kind of public court or trial proceedings in connection with such claims. The Form U-4 advises the employee, among other things, that he or she is "giving up the right to sue a member, customer, or another associated person in court, including the right to a trial by jury."3

Of course, many employers, and not only those in the financial services industry, routinely enter into similar predispute agreements to arbitrate employment-related claims, and courts have found such agreements to be valid.4 The U.S. Supreme Court also recently made clear that, in general, predispute agreements to arbitrate are fully enforceable. See AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), and Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011).

Amidst these favorable developments validating the use of predispute arbitration agreements, however, has been one very notable exception. Enacted in July 2010, Dodd-Frank added numerous provisions to federal law that were intended to encourage employees of publicly traded companies, their reporting subsidiaries, and rating organizations to make so-called whistleblowing complaints.5 Among other things, Dodd-Frank amended existing whistleblower provisions under the Sarbanes-Oxley Act to provide that "no predispute arbitration agreement shall be valid or enforceable if the agreement requires arbitration of a dispute arising under this section." Dodd-Frank also adopted a new and separate anti-retaliation provision for whistleblowers who make securities-related complaints to the SEC and elsewhere, and the SEC has since taken the position that predispute agreements to arbitrate those claims are prohibited by Section 29(a) of the Securities Exchange Act.6

Rule 13201 of the FINRA Arbitration Procedures currently provides that claims of employment discrimination, including sexual harassment, are not required to be arbitrated unless "the parties have agreed to arbitrate it, either before or after the dispute arose."7 At some securities firms, such claims are still routinely handled pursuant to a predispute arbitration agreement. This is not universally true, however, because some firms find that they are better off in court where, for example, they may present dispositive motions.

If FINRA were to adopt the proposed changes to Rule 13201, the foregoing provisions relating to the resolution of disputes involving claims of employment discrimination would remain unchanged, allowing parties to agree in advance of any such dispute that it be resolved through final and binding arbitration. However, the amendment would establish a new subsection (b) to Rule 13201, providing that "a dispute arising under a whistleblower statute that prohibits the use of predispute arbitration agreements is not required to be arbitrated under the Code. Such a dispute may be arbitrated only if the parties have agreed to arbitrate it after the dispute arose." (emphasis added) Such language would also be added to the standard Form U-4 if the proposed changes are adopted.

The proposed rule change is not limited to Dodd-Frank or Sarbanes-Oxley claims and apparently would apply to a claim under any "whistleblower" statue that includes a prohibition against predispute agreements to arbitrate. As a result, the proposed rule change may extend far beyond claims under Dodd-Frank, which itself defines "whistleblower" broadly to include any person who provides information related to a possible violation "of the federal securities laws (including any rules or regulations thereunder) that has occurred, is ongoing, or is about to occur."8

It is also important to note that Dodd-Frank and the amended FINRA rule may mark the beginning of a trend toward broader legislative efforts to invalidate predispute arbitration agreements. One such effort, the proposed Arbitration Fairness Act of 2011, S. 987 and H.R. 1873, would invalidate predispute agreements to arbitrate any kind of employment, consumer or civil rights matter. To date, this legislation has drawn 14 senators and 75 representatives as cosponsors.9

Individuals and organizations who wish to comment on the proposed Rule change need to act quickly. Comments must be submitted to the SEC by Tuesday, January 3, 2011. Such comments may be submitted via e-mail or letter to the SEC or electronically at this web page. All comments submitted to the SEC will be made public.

Employers who have concerns regarding the use or enforceability of predispute arbitration agreements should contact experienced employment counsel for advice.

Footnotes

1 See www.finra.org/AboutFINRA/.

2 FINRA Code of Arbitration Procedures, Rules 13000, 13200 et seq., available at http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=4193.

3 FINRA Rule 2263, "Arbitration Disclosure to Associated Persons," Form U-4.

4 See, e.g., Giuliano v. Inland Empire Pers., Inc., 149 Cal. App. 4th 1276, 1289 (2007) (California employment agreement).

5 For a detailed discussion of the "Bounty Hunter" provisions of Dodd-Frank, see the Littler Report, Dodd-Frank and the SEC Final Rule: From Protected Employee to Bounty Hunter (July 1, 2011), available at www.littler.com/files/press/pdf/LittlerReportDoddFrankAndTheSECFinalRule.pdf.

6 Implementation of the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934, p. 19-20, available at www.sec.gov/rules/final/2011/34-64545.pdf.

7 In such event, the claim is administered under Rule 13802, which provides detailed provisions as to the composition of the arbitration panel, arbitration fees, hearings and awards.

8 Dodd-Frank Final Rules, § 240.21F-2(a), available at www.sec.gov/rules/final/2011/34-64545.pdf.

9 S. 987, available at www.govtrack.us/congress/bill.xpd?bill=s112-987, and H.R. 1873, available at www.govtrack.us/congress/bill.xpd?bill=h112-1873.

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